Steps to Assuming a Mortgage From a Family Member
Mortgage assumption lets buyers “inherit” mortgages from sellers. However, you are still very much buying a home of your own. Assuming a mortgage can be a great technique when interest rates are high as you may be able to assume the original loan’s rates. With a mortgage assumption, the terms and balance of the existing mortgage are transferred to the buyer from the seller at closing.
Assumed mortgages aren’t common. However, they are sometimes used when a home sale occurs between family members. For example, someone might take over mortgage from parents when buying the family home. Even spouses sometimes assume loans.
The big thing to remember is that you’ll still need to prove your creditworthiness to a lender and meet all borrowing criteria when assuming a loan from a family member.Â
Step 1: Loan Eligibility
Not every mortgage is assumable. Generally, feasibility for this path to homeownership comes down to existing loan type and lender policies. Let’s look at loans where assumption is potentially possible.
FHA Loans
Many first-time homebuyers seek out Federal Housing Administration (FHA) loans because they offer lower down payments and flexible approval criteria compared to conventional mortgages. FHA loans can be assumable when specific requirements are met. First, your lender must approve the sale. Lenders generally use a formula that looks at the borrower’s creditworthiness and the property’s loan-to-value (LTV) ratio when determining eligibility for FHA assumed loans. You’ll also need to meet all requirements for FHA loan applications. State laws can sometimes impact your ability to assume an FHA loan.
VA Loans
The VA loan program allows qualifying non-veterans to assume VA loans. Low interest rates make VA loans especially attractive for homebuyers seeking to assume mortgages. Be prepared for a somewhat rigorous approval process if considering assuming a mortgage from a family member with a VA loan.Â
When assuming a VA loan from a family member, the lender will verify your creditworthiness by looking at your credit score, credit history, assets, debt-to-income ratio (DTI), and employment status/income.Â
USDA Loans
The assumption process for USDA loans is similar to the process for FHA loans. Of course, the major difference is that the property must be located in a designated rural zone. As the person assuming the loan, you must also meet all standard USDA loan eligibility criteria. That means having the USDA’s required income level and DTI. You’ll also need to meet the existing lender’s criteria.
One caveat with USDA loans is that you’ll need to cover the equity the seller has accumulated since purchasing the home. If your family member has paid off $20,000 so far, you’ll need to bring that amount to closing to separate them from their loan. As a buyer, you’ll need to weigh the benefit of no down payment and a lower interest rate against the equity money you’ll need to pay at closing to see if assuming the mortgage from your family member really is the best choice.
Conventional Loans
Conventional loans are mixed when you’re trying to assume a mortgage. Most aren’t assumable because they have strict “due on sale” clauses that require the seller to pay the full mortgage balance if ownership is transferred. If you’d like to take over mortgage from parents or another family member, you’ll need to have the seller speak to their lender about the loan’s ability to be assumed.
Step 2: New Borrower Eligibility
As mentioned above, you’ll need to qualify as a “new” borrower when assuming any type of mortgage. You cannot piggyback on the strong credit history or income of a family member when assuming their mortgage through a lender. That means preparing all of the standard documents you need for loan application. Your lender will conduct a full loan approval process that looks at:
- Credit score & history
- Employment history
- Income going back two years
- Assets & bank statements
- DTI
Step 3: Simple vs. Novation
As you get deeper into the process of potentially assuming a mortgage from a family member, you’re going to hear about simple assumptions and novation assumptions. You’ll need to decide which one works for you. With a simple assumption, the original borrower remains on the mortgage after the buyer takes over the title and payments. With a novation assumption, there’s a full transfer with zero legal ties remaining between the original borrower and the mortgage/property. Interest rates in both situations remain the same.
Simple Assumption Pros and Cons
Pros:
- No special fees or equity payouts required
- May not require loan underwriting
- No need to show a proof of funds (POF) letter to your family member
Cons:
- Original borrower maintains liability for the mortgage
- Original mortgage holder’s credit can be hurt if the buyer doesn’t make loan payments or pay property taxes in full
Novation Assumption Pros and Cons
Pros:
- Seller is completely released from liability
- Smaller potential for conflicts between family members
Cons:
- Extensive approval and underwriting process
- Buyer may need to pay seller for equity with some loan types
Can a family member take over a mortgage after death?
Yes, it’s possible to assume a mortgage after death. However, the probate process must first determine who legally inherits the house. If you inherit a deceased family member’s home, you’ll need to speak with the lender to decide if you should assume the loan or simply make payments to satisfy the debt.
Is An Assumption Right For You?
It’s easy to think that assuming a mortgage is a more “relaxed” way to purchase a home. However, you’ll need to pass the current lender’s approval requirements and assuming a mortgage means you’re giving up your right to shop around for a preferred lender.
While you may trust a family member, you still shouldn’t skip over the title review process that’s used for traditional home sales. Finally, it’s important to know that the legal and liability implications when assuming a mortgage can shift family dynamics. You are choosing to intertwine your homeownership journey and personal finances with a family member’s credit.Â
